Are home equity lenders teasing with teasers?

That's what it looks like lately. In the past few months, banks around the United States have shortened their home equity line of credit teaser rate periods, have raised the teaser rates they do offer or have gotten rid of them altogether.

The moves, coupled with the recent increase in the prime rate, mean new HELOC customers face both higher initial rates and higher long-term ones.

Plan ahead for higher rates
As a result, homeowners who want to tap their equity should evaluate whether they can afford to make payments if low introductory rates become scarce and long-term ones continue their upward climb. If they can, they need to carefully consider which equity line options make the most sense for them, because some lenders are offering incentives other than teasers that can benefit savvy shoppers.

"How long have we had our introductory rates in place? Pretty much always, or at least for the last four or five years," says Janis Tarter, a spokeswoman for California Federal Bank. Yet the Golden State Bancorp subsidiary dropped teaser rates altogether this month.

"We lowered the standard rate by a quarter point, so this next step to eliminate the introductory rate was a planned step," she adds. "That was to compensate for the compressed spread that occurred when we lowered that standard."

Lenders' experimentation
If falling standard rates, rising intro rates or nonexistent teaser rates just increase your rate of confusion, don't worry -- you're not alone. Lenders are constantly toying with what they offer in order to make the most money off consumers without scaring them away. That leads to an ebb and flow in the popularity of certain programs, and right now consumer-friendly teaser rates on equity lines -- which work the same way as credit card teasers do -- seem to be going out with the tide.

Between 1994 and 1997, for example, the number of lenders offering a teaser rate that was less than the prime rate dropped to 58 percent from 63 percent, according to figures provided by the Consumer Bankers Association. The average period the introductory rate was in place for, meanwhile, slipped to 7.9 months in 1997 from 10 months in 1995. And while numbers from the Bankers Association show anywhere from two-fifths to three-fifths of lenders have been offering teaser rates the past few years, Bankrate.com research turned up several large lenders from Pennsylvania to California in 1999 that have either cut back on the programs they offer or stopped providing them entirely.

Cal Fed, for one, eliminated its six-month intro rate of 5.75 percent earlier this month. The California and Nevada lender now charges interest at The Wall Street Journal prime rate plus 1 percent, or 9.25 percent as of Oct. 27. Sovereign Bancorp Inc. of Philadelphia, which lends in Pennsylvania, New Jersey and Delaware, deep-sixed its 5.24 percent teaser rate program in favor of an 8.74 percent standard rate around the same time. And this April, Wells Fargo & Co. of San Francisco, which extends home equity lines of credit throughout the West and Midwest, dropped its teaser rates in favor of pricing based on the amount of business customers do with the bank.

"Pretty much what's really behind us, as well as the industry, is the fact we had just moved away from the teaser rate because we really believe what's better for the customer is just giving them the better lifetime rate," says Aaron Garner, Sovereign's vice president of retail marketing. "A lot of banks will bring them in at a teaser rate and eventually the rate will go up after a period of time. We'll give you a good rate up front and that good rate will last for the lifetime of the loan."

Replacing teasers with incentives
With all of this gamesmanship going on over teaser rates, consumers need to assess their borrowing needs before signing away their home equity. Some will have to change their habits, but others, if they know how to shop, might come out ahead. That's because certain lenders are replacing teasers with longer-term rate incentive programs.

Loan-hopping borrowers, for instance, are going to find it harder to get by because new equity lines at below-prime rates won't necessarily be available once their initial three-, six- or 12-month teaser periods end. Those who don't read the fine print may get into hot water, too. New York-based Dime Bancorp Inc. dropped its flat home equity line of credit rate of 8.75 percent to 5.75 percent this summer. But that's only for three months and borrowers who don't take out at least $25,000 at closing will pay prime plus 1.95 percent, or 10.2 percent, thereafter.

Consumers with longer-term horizons, higher balances or stronger credit still miss out on a few months of cheap money because of this teaser rate terror. But they can mute the impact by finding lenders willing to make rate deals to their kind of customer.

Room to maneuver
Cal Fed's new stated rate is prime plus 1 percent, for example. Yet it isn't set in stone. A customer with pristine credit who elects to have the equity line payment deducted automatically from a checking account and who maintains an average daily balance of at least $25,000 will pay interest at the prime rate with no margin at all. Wells Fargo lowers the rate for borrowers who have brokerage and checking accounts or other "relationships" with the company, too.

"Customers who are the most interest rate sensitive and look for the best rate available at any point in time may very well, when you offer an introductory rate, be very interested in accepting that rate from you," says David Thomas. The executive vice president at Princeton, N.J.-based Summit Bancorp, which hasn't used teaser rates for years, sits on the CBA's home equity lending committee.

"But at the end of the introductory rate, if they are still looking for the best rate, they will just look to see who is now offering a low introductory rate and just switch banks," he adds. "It increases the amount of customer defection that we have."

Banks want you -- to borrow
Given that industry approach to home equity lines, consumers need to know exactly what they're bringing to the table before talking to a loan officer. Above all, they should also realize that they can negotiate from a position of strength because lenders want their business now more than ever.

"We offer more choice in terms of product" today, says Colin Walsh, senior vice president of Wells Fargo's home equity group. "Now we offer more customization on the pricing in terms of looking at the whole relationship they have with us. We're trying to create much more customization so the load is tailored to the person.

"If you're out there pushing only low price," he adds, "you're playing sort of a commodity game."

-- Posted: Oct. 27, 1999